Chairman's Message

Dear Stakeholder,

Your company has delivered a commendable performance recording a turnover of LKR 6.77 Bn and net profit (Total Comprehensive Income) of LKR 407 Mn for the financial year 2014/15. It continues to be a profitable Regional Plantation Company demonstrating its resilience and ability to respond to both opportunities and adverse movements in its operating environment. A continuing commitment to the triple bottom line, people, planet and profits, provides a solid foundation for driving excellence in key operational areas which has enhanced productivity in many areas, optimising its resources. The Board is pleased to note that the company has received 15 awards during the year for its performance in diverse areas such as financial reporting, people development and corporate social responsibility which serve as external benchmarks of its performance.

Economy

Global growth in 2014 was 3.4%, in line with the growth rate recorded in 2013 although the areas of growth are changing gradually. Growth in advanced economies picked up whilst growth in emerging and developing economies moderated reflecting uneven growth. Amongst advanced economies, growth was mainly supported by the recovery of US and to a lesser extent UK. Recovery in the Euro Area was positive although below forecasts but is expected to strengthen through co-ordinated action such as the recent asset purchase by the European Central Bank and is expected to increase the pace of growth. Emerging and developing Asia continues to be the fastest growing economic area with India and China recording growth rates in excess of 7%. Growth forecasts for Russia have been cut sharply in view of the Ukraine crisis and ensuing trade sanctions which are adding to Russia’s economic woes. The surprising and sharp decline in oil prices will have a positive impact on importing countries and a negative impact on oil producing countries contributing to divergent growth patterns. Commodity markets also declined significantly during the year and is forecast to decline further impacting almost all the countries. These changes necessitate a more granular approach to assessing global growth and a deeper understanding of the forces driving change in order to identify opportunities and threats to business performance.

Sri Lanka’s economy grew at 7.4% marginally above the 7.2% recorded in the year 2014, supported mainly by strong domestic consumption and to a lesser extent, investments on construction. Per capita income increased from USD 3,280 to USD 3,625 supporting the increasing consumption. The industry and services sectors recorded positive growth supported by increasing demand in export markets and increased tourist arrivals whilst adverse weather conditions impacted the growth of the Agriculture sector. Year on year inflation declined to 2.2% due to the monetary policy stance and the decline in global commodity prices including crude oil. Unemployment remained low at 4.3% with only a marginal increase in the labour force. Exchange rates were impacted by increased imports and measures implemented to stimulate credit expansion resulting in the USD moving up from LKR 131.04 at previous year end to LKR 132.90 as at 31 March. Change in the country’s governance structures resulting from the Presidential election are monitored to evaluate possible impacts on the operating environment and the company.

A Resilient Performance

The Company recorded a profit (Total Comprehensive Income) of LKR 407 Mn for the year and a top line growth of 10% delivering a resilient performance responding proactively with smart strategy balancing the short term and long term needs. Palm oil remains the largest contributor to profitability and the second largest contributor to revenue recording 12% top line growth and segment profits of LKR 780 Mn, reflecting a profit growth of 23%. Tea and rubber were impacted by falling commodity prices and principal markets for tea were impacted by declining oil prices leading to low market prices at the Colombo Tea Auctions. Your company continues to be the highest producer of tea in the country as a result of continuous efforts to improve productivity of land and labour through high levels of employee engagement and sound agricultural policies and practices. However, industry wide consensus and changes in government policy are an urgent need to resolve underlying structural issues to achieve meaningful change in tea and rubber segments. Adverse climate changes also played a significant part in the reduced profitability of the company. The company has increased emphasis on its diversification projects which have contributed positively to the bottom line.

Resource allocation remains a key criteria for success and the performance delivered this year reflects the capability of the management team in driving efficiencies. The Company invested LKR 357 Mn in field development and a further LKR 232 Mn in fixed assets in line with growth plans. Working capital management improved optimising cash flow. Early adoption of triple bottom line concepts has also enabled productivity in the fields and factories as empowered and engaged associates worked on innovating to improve performance. It also resulted in focused efforts on energy management which has also contributed to productivity gains.

An interim dividend of 95 cents per share has been paid in the 2nd quarter and the Board has recommended a final dividend of LKR 50 cents per share for approval by the shareholders at the Annual General Meeting. Consequently, the total dividend per share amounts to LKR 1.45 in view of the performance delivered for the 2014/15 financial year.

Way Forward

Your Company will pursue a diversification strategy to deliver sustainable returns to our shareholders. We are confident that we have in place a management team that is capable of delivering our strategy. As with any business today, external factors provide a mixed landscape presenting both opportunities and risks which are closely monitored. Strategic plans in place have taken in to likely developments both globally and locally to facilitate appropriate action in a timely manner.

Strategic Alliances

The strategic alliances between Sunshine Holdings Plc, Tata Global Beverages and Pyramid Wilmar Plantations who are joint venture owners of our parent Estate Management Services (Pvt) Ltd., provides access to technical know-how and networks across their supply chains expanding business opportunities. Presence of their representatives on the Board enriches discussions on matters discussed and we are able to broaden the options available for strategic growth. This has enabled the company to venture in to new markets and new products with higher value addition enhancing the company’s growth prospects.

Governance

We also welcome to the Board Mr.Ajoy Misra, Managing Director and CEO of Tata Global Beverages who is a Non Executive Non Independent Director following the resignation of Mr.Harish Bhat from the Board. The Board now comprises three nonexecutive independent directors members which includes myself as Chairman, 6 non-executive non independent directors and 2 executive directors.

Acknowledgments

Firstly, I wish to place on record my sincere appreciation to all our employees at Watawala Plantations who have demonstrated their strength and ability to deliver in challenging times. Their performance has enabled us to outperform the sector in many ways and is testimony to their talents and adaptability. I also wish to thank the Board who have provided wise counsel and guided strategy during a challenging year and I am deeply appreciative of their objectivity and the depths of discussion on matters set before the Board. I am appreciative of the continued support extended by our Bankers who have worked together during the year as strategic partners with a good understanding of our requirements. Relationships with our brokers have also strengthened during the year and we count on their continued support for our growth. Our buyers are key to our growth and provide valuable feedback to enhance the quality of our products. We look forward to strengthening relationships and enhancing the levels of engagement in the coming year. I extend my appreciation to our suppliers who provide us with high quality inputs in order to ensure quality of the final product and are key partners in progress for Watawala Plantations. I also extend my appreciation to our shareholders who have demonstrated high levels of engagement providing valuable feedback on areas of concern. I look to your continued support in the coming year to turn in a strong performance for the year that has commenced.

Sunil G Wijesinha

Chairman

21 May 2015

Managing Directors Review

Dear Stakeholder,

Watawala Plantations has delivered a resilient performance for 2014/15 to retain its position as one of the most profitable Regional Plantation Companies (RPCs) in the country. The results delivered are attributable to an unrelenting focus on productivity and smart strategy which enabled us to respond effectively to unprecedented challenges from external factors. We continue to be the highest producer of tea in the RPC sector for the 3rd successive year and it is with satisfaction that we note our simultaneous improvements in quality.

Operating Environment

The agriculture sector accounted for 10.4% of GDP in 2014 as performance of the sector declined from 10.8% due to adverse weather conditions. The contribution from Tea to GDP remained flat at 0.9 supported by the second highest quantity produced of 338 Mn kg only marginally lower than the highest production of 340 Mn kg in 2013. Tea prices were buoyant during the first half of 2014/15 but declined sharply during the second half as key markets for tea such as Russia and Middle East countries were adversely impacted by declining oil prices and political turmoil including trade sanctions.

Prices for Palm oil also declined as commodity markets declined during the second half of the year. However, a recovery is predicted for this market due to increased investment in bio-diesel plants and increased awareness of health issues.

Rubber production declined for the third consecutive year accounting for a mere 0.1% of GDP due to adverse weather conditions and declining prices. Declining oil prices impacted the rubber sector as prices of synthetic rubber decreased reducing demand for natural rubber.

Employee productivity and wages remain a key legacy issue for the entire plantation industry as productivity is well below other tea producing countries and employee costs account for 60% of revenue. The biennial wage negotiations currently underway must balance stakeholder interests addressing sustainability of the industry with the needs of the employees to achieve a meaningful transformation of the industry.

Smart Strategy

Our unswerving commitment to taking a long term view and investing in people, land and our factories strongly supports our ability to compete effectively. Productivity efficiencies featured throughout this report are testimony to the operational strategies that have supported performance delivery in 2014/15.

The main strategy to deliver sustainable growth and returns has been crop diversification as traditional crops such as tea and rubber offer few opportunities for growth due to legacy issues within the plantation industry and external demand.

This year’s results confirm the foresight of this strategy as Oil Palm introduced to Watawala Plantations continues to cushion the losses arising from the traditional sectors. We have also diversified in to timber and dairy farming with pilot projects which are yielding positive results enhancing land productivity.

During this financial year, the company has also increased focus on quality in response to market conditions. Consequently, Rainforest Alliance certification was extended to a further 4 estates with more planned for 2015/16. This confirms our adherence to international best practice with regards to social and environmental practices and positions our products at a premium. It is encouraging to note that our estates meet many of the criteria due to our commitment to sustainability.

The company also focused on productivity of its capitals as set out in this report with emphasis on driving land productivity and labour productivity. Land productivity is addressed through crop diversification and good agricultural practices. Employee productivity was addressed through comprehensive training programs to enhance field and factory productivity with positive results. Energy efficiency was a key area of focus and several initiatives implemented contributed to curtail this key cost. As we looked beyond cost for solutions, we were able to switch to use of renewable energy in a number of factory processes.

Delivery of strategy is monitored through a structured review process at estate, regional and company level ensured that we initiated prompt action in response to early warning signs identified through monthly reviews.

Delivering Performance

The Company has delivered commendable performance with revenue growth of 10% and a net profit (Total Comprehensive Income) of LKR 407 Mn during a year of unprecedented challenges. Oil Palm has cushioned the losses sustained from the tea and rubber operations contributing LKR 780 Mn net profit whilst tea and rubber recorded net losses of LKR 427 Mn and LKR 91 Mn respectively. The export sector recorded a net profit of LKR 26 Mn contributing positively to the bottom line. Consequently, net profit of the Comapny declined by 6% over 2013/14 to LKR 407 Mn.

A Peoples’ Business

We continue to focus on the quality of life of our employees with structured programmes in place for those who are resident on our estates. Accordingly, initiatives were implemented across the estates to address the legacy issues of social and financial inclusion of the estate sector employees. Programmes were implemented to issue national identity cards for our employees within the estate premises assisted by the estate management. This paved the way for employees to access services such as opening a bank accounts which would facilitate savings for their socio economic progress. Subsequently, we worked with Hatton National Bank to install ATM machines on four estates and provided training for staff to encourage its use. I believe that this is an important step as financial inclusion will facilitate upliftment of their quality of life through building a security net. It is also extremely gratifying to observe the PAYE contributions of high performing associates at our Oil Palm plantations as they have increased their earnings beyond the tax free limits.

Our established programmes to ensure the health and safety of our residents continue to yield positive results. Maternal and child mortality is below the national average and births are taken place in hospitals under medical supervision. Prenatal care and post-natal care and education is provided on the estates in collaboration with the Medical Officers of Health of the area. Our Child Development Centres operated for children under the school going age monitor the health of the children in their care and address issues such as nutrition, immunisation and early childhood development through innovative and collaborative means. A few estates with significant elderly populations have also commenced work for these groups of residents arranging activities to keep them occupied and their spirits uplifted. We continue our work with the Plantation Human Development Trust and other NGO’s to provide water, sanitation and housing to our residents.

Women empowerment remains a key focus as many of our Associates are females through our programme to develop female Kanganee’s which has been the exclusive prerogative of males until recent times.

Achievements & Accolades

The company encourages operational excellence in key areas and it is with pleasure that I report that we have won a total of 15 awards during 2014/15. Regular benchmarking against defined criteria by an objective panel of judges provides valuable feedback to management about our business processes and results. These awards are the result of a highly engaged and motivated team of employees who challenge themselves to raise the bar each year and I congratulate the corporate management team for their leadership and the teams for the ideas and hard work that has gone in to driving excellence. The highlights of the awards are:

¢ Gold Award at the Asian CSR Leadership Awards in recognition of our efforts to empower the differently abled, by providing them employment and the ability to sustain themselves, through the Vocational Training Centre at Kenilworth Estate

¢ Best Presented Annual Report 2014 under the Agriculture Sector category at the South Asian Federation of Accountants (SAFA) Annual Report Awards Ceremony

¢ Joint Winner - Best Annual Report in the Plantation sector awarded by the Institute of Chartered Accountants of Sri Lanka for the 7th consecutive year

¢ Winner, Best Corporate Citizen in the Agriculture sector at the Ceylon Chamber of Commerce Awards in recognition of our triple bottom line performance

¢ Special Award for The Commendable Achievement of Being the Largest Producer in the Corporate Sector with a Sale Quantity of 9.87 Million Kgs among the Regional Plantation Companies in 2013 awarded by Forbes & Walker and also by John Keells PLC at separate ceremonies

The Way Forward

The outlook for the plantation sector in Sri Lanka requires a careful assessment of forces shaping global demand and our ability to compete whilst delivering value to our stakeholders. The positioning of Ceylon Tea in terms of quality, growing awareness of the benefits of tea and the country as an ethical sourcing destination are key strengths. Forces shaping demand factors are less positive as Iraq and Russia, the two largest markets for Ceylon Tea, are beleaguered by economic and political crisis. It is exacerbated by the decline in oil prices affecting key markets as they are oil producers and many of them are also impacted by confrontational politics. Tea prices which declined sharply in the 3rd and 4th quarter have not evinced signs of recovering to profitable levels.

Government policy can play a key role in determining the future of the tea industry. The lack of a policy on Tea deters further development of the industry. Additionally, promotional funds collected by way of a cess levied on each kilogram of tea exported has grown up to LKR 3.5 Bn without a proper plan for effective utilisation of funds while tea prices continue to decline. Inability of the Sri Lanka Tea Board to execute an effective promotional campaign leaves the industry at a huge loss and requires urgent attention.

Our ability to compete effectively is hampered by political agendas which impact the biennial negotiations of the collective agreement with the trade unions. The present form, over emphasising employer obligations and employee rights without sufficiently balancing employee obligations, hinder efforts to enhance productivity. This is a sine qua non for competing effectively with other tea importing countries and needs urgent resolution.

A diversified plantations industry is critical to the socio economic development of our country as it impacts a wide group of stakeholders and has the potential to secure selfsufficiency in key imported food items. It is the focal point of the global food industry which is strategizing to increase food production to meet the needs of a growing population that strain food supply chains. Appropriate policies are necessary to drive the changes that are overdue for this sector to optimise the vast resources employed in this sector.

Watawala Plantations is committed to a long term vision of a profitable, diversified plantation company that sets the benchmarks for operational excellence in the country. We are well positioned for growth with smart strategies to overcome the challenges with the added advantage of strategic alliance with two global giants, TATA Global Beverages and Wilmar Plantations to add to the strength of our parent. Access to technological knowledge, distribution networks and markets are just a few advantages that Watawala Plantations for its sustainable growth.

Acknowledgments

I extend my sincere appreciation of the team at Watawala Plantations who have worked with dedication and enthusiasm to achieve their levels of performance enumerated in this report. The Board has provided wise counsel and guided strategy during a challenging year and I am deeply appreciative of their objectivity and the depths of discussion on matters set before the Board. Our shareholders, customers, suppliers and strategic partner have provided valuable feedback and we are appreciative of their high levels of engagement. I look to your continued support in the coming year to turn in a strong performance for the year that has commenced.

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